The next commodity boom
Page 1 of 2
Christine St Anne is Morningstar's online editor.
In February, the US secured US$6.7 billion worth of soybean exports to China. The country has also boosted its exports in corn to China by four times over the past few years.
The growing demand for these soft commodities is indicative of China's growing urbanised population.
Morningstar China analyst Zhao Hu says China's huge imports of corn over the past three years will only continue.
Besides the "record" soybean import deal between the US and China, Hu believes China will also extend its imports to other soft commodities.
"The lower middle class of Chinese workers will see their spending grow from rising wages, and so will their appetite for meat and milk," Hu says.
Soft commodities refer to commodities that are grown rather than mined. They can include sugar, wheat soybeans and coffee.
Australia currently exports a number of soft commodities to China, including sugar, wheat and wool.
According to a recent Rabobank commodities report, Australian wheat exports to China are expected for double in 2012, particularly as China grapples with higher corn prices.
Morningstar senior equities analyst Ross Macmillan says the soft commodities sector will continue to grow as populations rise.
"Countries are increasing their demand for food and other soft commodities, particularly as their populations continue to grow," Macmillan says.
Macmillan also notes the Australian soft commodities sector is attracting interest from globalised companies, particularly those from China and India.
Pesticide producer Nufarm (NUF) has a strategic partnership with Japanese firm Sumitomo Chemical, while Chinese companies are looking at investing in a number of Australian farms.
Graincorp (GNC) is one company that is reported to be under the microscope of Canadian agribusiness firm Viterra.
Macmillan says while the production of Australia's soft commodities is geographically well positioned near Asia, there are only a select number of agribusiness companies to choose from.
"Our agricultural sector is subject to a high level of rationalisation, with a number of acquisitions taking place over the last few years," he says.
Also, Australian companies need to have sufficient scale to counteract the environment-based and seasonal risks that come with managing crops.
Therefore, scale and geographical diversification are important considerations for Australian investors.